Policymakers will have to be alert in case the crackdown on shell companies registered in India drives them to tax havens abroad. Photo: Aniruddha Chowdhury/Mint

The decision by markets regulator Securities and Exchange Board of India (Sebi) to suspend trading in 331 listed firms that it says are shell companies comes soon after finance minister Arun Jaitley told Parliament that 162,000 shell companies have already been deregistered. Shell companies are bogus entities that do not produce anything but are used as conduits to evade tax through financial skullduggery. These are welcome moves in the larger road towards a cleaner business environment.

There is no proper estimate of the number of shell companies in India—but the wide gap between the number of companies registered with the ministry of corporate affairs and the number of companies that file tax returns gives us some idea of the scale of the problem (though some shell companies do file tax returns). Policymakers will have to be alert in case the crackdown on shell companies registered in India drives them to tax havens abroad. The overdue drive against shell companies needs to be backed by reforms for a more simple tax structure that helps honest entrepreneurs.